This is a golden opportunity for China.

In the Chinese language, every crisis has an opportunity hidden in it. This is reflected in the Chinese word: 危機. An opportunity (機) always comes after a crisis (危).

Yes, slamming tariffs would hurt both Chinese and US economy and that would be a crisis. But as we said, there are many opportunities behind it. And in this answer, I will tell you what opportunities are available for the Chinese and what China is likely to do.

The trade war is an equilibrium-based chess game. Your moves do not immediately reflect the consequences. And they might return on investment some time later.

We all know that Donald Trump loves dramatic moves and the pageantry of the mighty trade war to slam the Chinese. He wants immediate effects he can see. Just like in Western/Indian chess, you can move your queen and kill all the pawns and knights along the way. These chess pieces would disappear and that is the “immediate effect”.

But the Chinese are playing a game of Go. They silently move pieces and pawns around. These moves might seem unrelated to you now but you will realise their effect when the time is ripe.

In the Go Game, we do not “eat” the chess piece but surround it. That means the Chinese won’t fight back by using the equal-valued tariffs or by hurting the American investments in China. To understand the actual Chinese moves, we need to understand the current situation:

Why did the US want a trade war?

The trade war is inevitable, regardless of whether Donald Trump or Hilary Clinton became president. Why? Let’s look at a few statistics:

• In 2014, China surpassed the US and becomes the world’s largest economy in terms of GDP (PPP). In 2019, the Chinese economy is 20% larger than the US.
• In 2019, China surpasses the US in terms of total retail sales and becomes the world’s largest market in pretty much every kind of product.
• In 2019, Chinese generates 50% more electricity and its manufacturing output is greater than the total sum of USA, Germany and Japan’s products combined.
• In 2019, China has 8x more STEM graduates (science, technology, engineering, and mathematics) and more patents and inventions than the US.

Whether Democrat or Republican, Congress or White House, politicians or Wall Street elites, they would all come to the consensus that they have to beat China before it is too late. This is their ultimate goal. The trade surplus is just an excuse. What the US wants is to make China fail just like Japan and the USSR—through a trade war.

$200 billion or even $500 billion, is that devastating to China?

Now let’s look at the current situation of the trade war. The USA slammed tariffs on $200 billion worth of goods, and Trump threatened to slam tariffs on all Chinese exports to the US. Is that so terrifying as you think?

Firstly please note that the tariffs on the $200 billion and later $300 billion could be just a bargain strategy from Donald Trump to scare China, and it is also behind his agenda to assist his future elections. He might lift the tariffs anytime in the future. In this case, China can just stay calm, insist on the original terms without compromising anything.

Secondly, even if the tariffs are enforced permanently, these are still “tariffs” and not a ban on the goods. And it doesn’t mean the $200 billion gets wiped out immediately. An immediate effect is that US customers see a sharp rise in their daily made-in-China products. And the long term impact is that the products would gradually get replaced by alternatives from other countries. And the alternative might just be a rebranded made-in-China product from Malaysia or India. It won’t be made-in-USA. Numerous studies have traced these “rebranded” routes for many products already.

Thirdly, China can easily offset the loss by continuing to promote its exports to the rest of the world. In 2018, China shipped $2.294 trillion dollars worth of products around the globe according to the International Trade Centre. The $200 billion only accounts for 8% of the total Chinese exports (also see China’s Top Trading Partners). Meanwhile, in 2018, Chinese exports to Europe (436 billion) increased by 7.9% and exports to ASEAN (279 billion) increased by 11.2%. For countries who signed up One Belt One Road (OBOR), the exports increased by 13.3%. We need to understand that the majority of the Chinese exports are within Asia and not the USA.

Fourthly, over the past five years, China has transformed its economy to focus on its domestic consumption. China is no longer an export-oriented economy like South Korea and Japan. Now in 2018 China has reduced its reliance on trade to 37% and export to GDP ratio to 18%, which is very similar to the USA.

The Chinese exports have not shrunk in value, but the domestic consumption has grown so much that the export fraction is significantly reduced.

What would be China’s strategy?

Now let’s look at what opportunities lie ahead.

Firstly, we need to understand that there would never be a fair trade deal between the US and China until either side is defeated. Even if an initial trade deal was settled, the US would push more and more until you are defeated. It is better to “procrastinate” the trade talks and win time to grow strong.

That means the strategy for China is to use 25% of its strength to play Tai Chi with the USA in the trade talks and 75% of the strength to slowly build up its strength in other areas.

For example, in the “Go” game, the US is hitting you hard in a small region in the chess board. You spend 25% of your strength to dodge his attack in the region and have to lose bit by bit but you use 75% of your other strength to “randomly” place pieces in other places in the chess board.

What are those “other places”? You guessed it. They are developing countries all over the world.

It is like how Mao Zedong uses the strategy of “using the rural areas to encircle the cities” to grow strong under Japanese occupation and defeat Chiang in a matter of time. The American think tanks would never understand this if they did not properly study Mao’s strategy.

In a matter of time, the USA would find themselves surrounded by a bigger force built by China—perhaps in the next ten years.

And please mark my words and see what happens in 2030.

What would be China’s detailed moves?

Counterattack 1: Be Open and Reliable

In the Go Game, if the US is hitting you hard in a corner of the chess board, China would dodge the attack and develop other regions. That means the Chinese won’t fight back using the equal-valued tariffs or by hurting the American investments in China.

If you are closed, then I am open. You are unpredictable but I am reliable. You don’t want me to invest in you but I want you to invest in me.

Apple, Starbucks, Nike, GE, and Tesla etc, you can continue to thrive in China without the worry of the harassment of the Chinese government. You are free to stay or you are free to leave. It is up to you. The Chinese market is always open. You don’t have to pick a side. We Chinese are always predictable so that your investments can be guaranteed by law.

Don’t believe me? You have my word and it is written in the law.

In March 2019, a new foreign investment law was issued in China.

New law to level playing field for foreign investors approved by China

China can continue to attract foreign investments, not because of its cheap labour, but also its top-notch infrastructure, logistics, an amazing variety of suppliers and OEMs, power reliability, government assistance, and a large domestic market bigger than the US.

Don’t trust the Chinese government? That’s fine. You can go to Hong Kong or the 12 free-trade economic zones of China. The Chinese government has the least presence in this area. But you have all the amazing infrastructure and logistics available to you.

Counterattack 2: Attack where it hurts

Being open and reliable to foreign investments does not mean that China won’t hit back. We just hit the part where the US would feel the pain.

Hey Boeing, we are not buying your planes any more. We will buy from Airbus from Europe. Airbus wins China order for 300 jets as Xi visits France

Hey Murica, our little Kim is now playing his missile again. Whatcha going to do about it? Second N Korea 'missile test' in five days

Hey Murica, how about paying me back 1.2 trillion dollar debt? You don’t wanna pay? Everyone says that “A Murican always pays his debt” right? Or do you want to be burned by dragons?

Hey Murica, just to let you know, we are going to build ports, roads and trains for your buddy Israel. We are building 5G and nuclear power station at your father’s place (UK). We are also building so many roads and ports in your southern backyard (Latin America).

Hey Murica, we are rebuilding Afghanistan, Iraq and Syria and cleaning your mess and making your trillion-dollar wars vain.

Counterattack 3: Boost Domestic Consumption

As China continues to lift its people out of poverty, people get richer and richer. Imagine how big the market would be if each of the 1.3 billion people has:

• A smartphone with 5G connection
• Access to online stores to buy and sell products, online live streams in games, cosmetics, comedy and pop music.
• A home with smart TV, smart air conditioner, smart fridge and kitchen appliances, smart speaker, a desktop computer, and many clothes.
• An electric scooter, a self-driving electric car and a mobility-as-a-service subscription to enjoy buses, metros and high-speed trains.
• Watch movies every two weeks, go to restaurants every day, go shopping every week, order dinner delivery through app.
• Subscribe to an online course, a doctor, a house cleaning service, an AI and python education for the kid etc.

Just in the year 2019, China has already exceeded the USA in total retail sales and reached 5.636 trillion dollars (China to overtake US as world’s biggest retail market). And this is really the turning point for the Chinese economy. These economic weapons of mass destruction are finally operational in China.

China can continue to use this huge advantage to attract foreign investments. If you want the Chinese market, well, please stay in China and manufacture the products. Otherwise, if you move to Vietnam, that’s fine. We will add a 10% tariff to your goods. Oh Vietnam, if you don’t want your products to get taxed, let us sign a free trade agreement. And here are our terms and conditions.

As a result, the Chinese market becomes its biggest trade deal leverage, and it is even larger than the US market.

For proof, in 2018, the foreign direct investment (FDI) into China exceeded 130 billion dollars, a 1% increase despite the chaos of the US-China trade war and many news reporting companies leaving China.

That means there is just the same amount of (actually more) foreign investments attracted to China as the amount of some investments who left China. For the new investments into China, they aim for the large Chinese market and want to avoid tariffs if they are manufactured in China. For the investments that leave China, they focus more on the US market due to the fear of trade war. These are two different types investments and we need to be aware of that.

For example, Tesla continues to invest in its mega-factories in Shanghai, not because of the low-cost in manufacturing in China or to aim for the US market but the huge benefits of avoiding tariffs in the Chinese market.

Existing investments in low-end manufacturing that rely on cheap labour would also face a dilemma between staying or leaving China. As in the future the Chinese market becomes larger and larger than the US, their best choice is to place one egg each in China and the USA, targeting two giant markets at the same time. That means they would not completely move out of China but they would head for poorer provinces of China such as Yunnan, Guizhou, Xinjiang, etc. This is exactly what Xi Jinping wants them to do.

In the past, we have seen low-end manufacturing migrate from Japan, South Korea, to China and now to Vietnam and India. But the migration is not just about crossing countries. A fraction of the manufacturing also migrated to poor provinces of China as well.

That means China is using this trade war as an opportunity to reorganize its domestic economic structure.

Counterattack 4: Let the EU take the economic lead against the USA

The USA won’t stop provoking wars and conflicts on all front both economically and militarily. That’s because they think you are threatening their status as the leading global superpower, and they are already treating you as a rival.

But it is still not a suitable time to fight with the USA on all fronts directly. We should learn from what Mao Zedong did strategically. We still need to lay low and focus on economic reforms and lift people out of poverty domestically.

That means in the current on-going trade war, we still need to compromise quite a few terms and give in non-critical benefits to the USA in the trade talks. For example, buy more oil, gas and other products from the USA because we are going to buy from someone anyway.

And give empty promises to the USA that we will reform our critical economic sector. The USA thought we fell into his traps. Our financial sector is made more “free” so that USA’s Wall Street could exploit it. But behind the scenes, we promised the USA we will change after the next USA presidential election. By that time, the Sino-American policies might change and we can restart the whole negotiation process again and again. This could buy us a lot of time to deal with the USA.

Submitting in the trade war can give the USA the impression that the USA is winning. So Donald Trump would continue to use the same strategy to poke the EU because he thinks this strategy could win. By that time, China can successfully divide the West. China can use every opportunity to promote the Euro to become the next major currency for oil trade and avoid Iran sanctions.

The more USA pokes her allies one by one economically, the more China wins the trade war bit by bit. The more fragmented and divided the “free world”, the more time we have to get stronger.

Counterattack 5: Drag the USA into another hot war

This is difficult to manipulate but it would be China’s golden opportunity if the USA participates in another major war with Iran, Venezuela, Syria or North Korea.

Thanks to the Iraq War in 2003 and Afghanistan War (2001-now), the USA has spent 1.1 trillion dollars and 2.7 trillion dollars respectively.

Financial cost of the Iraq War - Wikipedia

The Ongoing Costs of the Afghanistan War

As a result, China gets a decade of peaceful development at a growth rate of over 10% without the harassment of the USA. Moreover, the USA got herself into debts and lost most of her manufacturing jobs to China. And ironically the debts are also held by the Chinese.

In 2019, the most likely war might be with Iran, and the US has already commanded everyone to stop buying oil and steel from Iran. And Iran threatened to quit the nuclear deal to start developing nuclear weapons again. If so, Israel and Saudi Arabia would retaliate and the USA would have to respond.

What we need to do is just watch, sip our Longjing tea and wait the USA to spend another trillion dollars in the war. Now US carrier groups are already stationed around Iran. Will they have war?

Until it is the right time, the trade war can be won.